UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from _____ to_____
Commission File No. 0-23450
CAPITOL FIRST CORPORATION
(Exact name of Small Business Issuer as specified in its charter)
Nevada 88-0361144
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7100 Camino Real Boulevard
Suite 402
Boca Raton, FL 33433
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (561) 417-7115
Check whether the issuer (1) filed all reports required to be filed by Section
12, 13 or 15(d) of the Exchange Act during the past 12 months (or for such
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[X] YES [ ] NO
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock ($.01 Par Value) 30,627,054
(Title of Class) Shares Outstanding as of February 6, 2004
Transitional Small Business Disclosure Format: [ ] YES [X] NO
CAPITAL FIRST CORPORATION
INDEX
Part I - FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
----
Consolidated Balance Sheet - December 31, 2003 (unaudited) F-1
Consolidated Statements of Operations (unaudited) - Three
Months Ended December 31, 2003 and 2002 F-2
Consolidated Statement of Changes in Stockholders's
Equity (Deficit) - Three Months Ended December 31, 2003 F-3
Consolidated Statements of Cash Flows - Three Months Ended
December 31, 2003 and 2002 F-4
Notes to Consolidated Financial Statements F-5
ITEM 2. Management's Discussion and Analysis or Plan of Operation 3
ITEM 3. Controls and Procedures 7
Part II - OTHER INFORMATION
ITEM 1. Legal Proceedings 8
ITEM 3. Defaults Upon Senior Securities 8
ITEM 4. Submission of Matter to a Vote of Security Holders 8
ITEM 6. Exhibits and Reports on Form 8-K 8
Signatures 8
Certifications 10-13
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF DECEMBER 31, 2003
Current Assets
Cash $ 1,301,978
Accrued interest receivable 57,393
Construction in progress 698,325
Notes and loans receivable, net of valuation allowance of $13,407 2,131,710
Other current assets 248,220
------------
Total Current Assets 4,437,626
------------
Property and Equipment
Furniture and equipment, net of accumulated depreciation of $1,475 28,025
------------
Other Assets
Land and real estate holdings 4,382,508
Deferred tax benefit 1,203,000
Other long-term assets 58,363
------------
Total Other Assets 5,643,871
------------
Total Assets $ 10,109,522
------------
Current Liabilities
Accounts payable and accrued expenses 379,473
Accrued dividends payable on preferred stock 54,034
Accrued expenses - related parties 12,543
Notes and loans payable 3,282,392
Notes payable - related party 1,245,000
------------
Total Current Liabilities 4,973,442
------------
Long Term Liabilities
Loans payable 210,000
Notes payable 3,000,000
------------
Total Long Term Liabilities 3,210,000
------------
Total Liabilities 8,183,442
------------
Stockholders' Equity
Preferred Stock - $0.01 par value, 7,500,000 shares authorized; 4,137,591
shares issued and outstanding 41,376
Common Stock - $0.01 par value, 40,000,000 shares authorized; 30,612,054
shares issued and outstanding 306,120
Additional paid-in capital 14,821,603
Preferred stock dividend (377,501)
Treasury stock; 3,861,693 shares (5,387,166)
Minority interests 100
Accumulated deficit (7,478,452)
------------
Total Stockholders' Equity 1,926,080
------------
Total Liabilities and Stockholders' Equity $ 10,109,522
------------
See Accountant's Report and Supplemental Footnotes.
F-1
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
AS OF DECEMBER 31,
2003 2002
Revenues
Sales of real property
$ 0 $ 0
Interest income - notes and loans 41,682 32,610
Fee income 610 0
------------ ------------
Total Revenues 42,292 32,610
------------ ------------
Cost of Revenue
Cost of sales - real property 0 0
Cost of sales - loans 10,414 0
------------ ------------
Total Cost of Revenue 10,414 0
------------ ------------
Gross Profit 31,878 32,610
------------ ------------
Operating Expenses
General and administrative expenses 139,061 57,084
General and administrative expenses - related parties 13,500 22,602
Placement agent, financial advisory and consulting fees 145,000 0
------------ ------------
Total operating expenses 297,561 79,686
------------ ------------
Net income (loss) before other income (expense) (265,683) (47,076)
------------ ------------
Other income and (expense)
Operations of unconsolidated investments 0 (75,000)
Interest income on cash balances 5,658 579
Other income 0 10
Interest expense (136,430) (31,554)
Interest expense - related parties (30,625) (38,499)
------------ ------------
Total other income and (expense) (161,397) (144,464)
------------ ------------
Net income (loss) from continuing operations (427,080) (191,540)
------------ ------------
Income tax expense (benefit)
Deferred 0 0
------------ ------------
Total income tax expense (benefit) 0 0
------------ ------------
Net income (loss) before extraordinary items (427,080) (191,540)
------------ ------------
Extraordinary items
Gain (loss) from retirement of debt at a discount, net of
income tax provision of $0 (25,000) 205,127
------------ ------------
Total extraordinary items (25,000) 205,127
------------ ------------
Net income (loss) $ (452,080) $ 13,587
------------ ------------
Basic income (loss) per share
Income (loss) before extraordinary item ($ 0.02) ($ 0.01)
Extraordinary items 0.00 0.01
Net income (loss) ($ 0.02) $ 0.00
Weighted average shares outstanding 30,220,750 29,412,054
See Accountant's Report and Supplemental Footnotes.
F-2
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003
Additional Preferred
Preferred Stock Common Stock Treasury Stock Paid-in Stock
Issued o/s
Shares Amount Shares Amount Shares Amount Capital Dividends
---------------------------------------------------------------------------------------------
Balance at 9/30/03 as
previously reported 4,137,591 41,376 29,290,050 292,900 3,629,989 (4,805,229) 14,172,886 (323,195)
Adjustment to correct
shares sent to
treasury not canceled 90,300 903 (903)
Adjustment to correct
stock contributed to
treasury 231,704 2,317 231,704 (581,937) 579,620
Common stock issued
on November 5, 2003 1,000,000 10,000 70,000
Preferred Dividends
paid in October (54,306)
Net loss for the three
months ended
December 31, 2003
Membership interests
---------------------------------------------------------------------------------------------
Balance at 12/31/03 4,137,591 41,376 30,612,054 306,120 3,861,693 (5,387,166) 14,821,603 (377,501)
---------------------------------------------------------------------------------------------
Accumulated Membership
Deficit Interests Total
------------- ---------- -----------
Balance at 9/30/03 as
previously reported (7,026,372) $2,352,366
Adjustment to correct
shares sent to
treasury not canceled 0
Adjustment to correct
stock contributed to
treasury 0
Common stock issued
on October 1, 2003 80,000
Preferred Dividends
paid in October (54,306)
Net loss for the three
months ended
December 31, 2003 (452,080) (452,080)
Membership interests 100 100
------------- ---------- -----------
Balance at 12/31/03 (7,478,452) 100 $1,926,080
------------- ---------- -----------
See Accountant's Report and Supplemental Footnotes.
F-3
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
AS OF DECEMBER 31,
2003 2002
Cash flows from operating activities
Net income (loss) $ (452,080) $ 13,587
Depreciation 1,475 329
Adjustments to reconcile income (loss) to net cash provided by
(used in) operating activities:
(Increase) decrease in accrued interest receivable (15,962) (15,929)
(Increase) decrease in other assets (108,120) (3)
Increase (decrease) in accounts payable and accrued expenses 92,437 (82,904)
Increase (decrease) in accrued expenses - related parties 2,490 (5,181)
(Increase) decrease in deferred tax asset 0 0
(Increase) decrease in loans receivable (1,145,117) 0
(Increase) decrease in construction in progress (698,325) 0
Increase (decrease) in valuation allowance 13,407 0
(Increase) decrease in deposits (8,363) 0
Increase (decrease) in loans and participations payable 906,000 0
----------- -----------
Net cash provided by (used in) operating activities (1,412,158) (90,101)
----------- -----------
Cash flows from investing activities
(Increase) decrease in real estate holdings 0 0
(Increase) decrease in investments 0 75,000
Loss on debt extinguishment 25,000
Purchase of fixed assets (29,500) 0
-----------
Net cash provided by (used in) investing activities (4,500) 75,000
----------- -----------
Cash flows from financing activities
Proceeds of notes payable 0 275,000
Payment of notes payable (23,190) (259,670)
Payment of deferred dividends (54,306) (11,285)
Change in accrual of preferred dividends 54,034 0
Issuance of common stock 80,000 0
Membership interests 100 0
----------- -----------
Net cash provided by (used in) financing activities 56,638 4,045
----------- -----------
Net increase (decrease) in cash (1,360,020) (11,056)
Beginning cash 2,661,998 16,981
----------- -----------
Ending cash $ 1,301,978 $ 5,925
=========== ===========
Schedule of non-cash financing activities
Preferred stock issued for debt $ 0 $ 216,858
Collection of note receivable by forgiveness of accrued expenses 0 261,308
Supplemental information:
Interest paid, net of current payoff discount of $0 and $56,203,
Respectively $ 162,822 $ 40,414
See Accountant's Report and Supplemental Footnotes.
F-4
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1 -SIGNIFICANT ACCOUNTING POLICIES
A. BACKGROUND
The Company was originally incorporated in the State of New York on November 8,
1968 under the name of Century Cinema Corporation. In 1983, the Company merged
with a privately owned company, Diagnostic Medical Equipment Corp. and as a
result changed its name to that of the acquired company. By 1990, the Company
was an inactive publicly held corporation. In 1993, the Company changed its name
to AWEC Resources, Inc. and commenced operations. On February 11, 1994 the
Company formed a wholly owned subsidiary AWEC Development Corp, an Arkansas
corporation, which later changed its name to Capitol Development of Arkansas.
In February, 1994 Petro Source Energy Corporation transferred the majority of
its holdings in the common shares of the predecessor corporation, AWEC
Resources, Inc., to Charlie Corporation and Prescott Investments Limited
Partnership, a beneficial owner of the Company.
In order to effectuate a change in domicile and name change approved by a
majority of the Predecessor Corporation shareholders, the Predecessor
Corporation merged, effective January 30, 1996, into Capitol Communities
Corporation, a Nevada corporation formed in August 1995 solely for the purpose
of the merger. On October 15, 2003, the Company filed a Certificate of Amendment
with the Secretary of State of Nevada to change its name from Capitol
Communities Corporation to Capitol First Corporation.
During the period from October 1 through December 31, 2003, the Company formed
five wholly-owned subsidiaries and one 50% joint development venture for which
the Company performs the duties of Operating Manager. These entities are Capitol
Development, Inc., a Nevada corporation; Toxaway Development Group, LLC, a North
Carolina LLC; Interfund Mortgage Corp., a Florida corporation; Interfund
Investment Fund I, LLC, a Florida LLC; Capitol Management, LLC, a Florida LLC;
and Philbuilt Development, LLC, a Florida LLC. The results of operations and
balance sheets of these entities are consolidated in the financial statements of
the Company.
The Company is primarily in the business of real estate development and
financial lending for its own portfolio. The Company also continues to sell
property from its inventory of real property located in Maumelle, Arkansas.
Loans of $1.5 million or less are approved by the loan committee. Board of
Director approval is required for loans greater than $1.5 million. Currently the
loan committee consists of the President and the Chairman of the Board.
B. PRINCIPLES OF CONSOLIDATION
The Consolidated financial statements include accounts of its wholly-owned
subsidiaries. All material intercompany transactions have been eliminated.
C. RECLASSIFICATIONS
Certain reclassifications have been made to the 2003 financial statements to
conform to the 2004 presentation.
D. REAL ESTATE HOLDINGS
Real estate investments are stated at the lower of cost or market. Acquisition
costs are allocated to respective properties based on appraisals of the various
properties acquired in the acquisition.
E. REVENUE RECOGNITION
Revenue is recognized under the full accrual method of accounting upon the
completed sale of real property held for development and sale. All costs
incurred directly or indirectly in acquiring and developing the real property
are capitalized.
F-5
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1 -SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
F. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
G. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, cash in banks, and any highly
liquid investments with a maturity of three months or less at the time of
purchase. The Company and its Subsidiaries maintain cash and cash equivalent
balances at several financial institutions which are insured by the Federal
Deposit Insurance Corporation up to $100,000. At times, the cash balances may
exceed federally insured limits. We have not experienced any losses in such
accounts and we believe the risk related to these deposits is minimal.
H. EARNINGS/LOSS PER SHARE
Primary earnings per common share are computed by dividing the net income (loss)
by the weighted average number of shares of common stock and common stock
equivalents outstanding during the quarter. The number of shares used for the
quarters ended December 31, 2003 and 2002 were 30,220,750 and 29,412,054
respectively.
I. VALUATION ALLOWANCE
We determined a loan delinquency rate based on industry averages published by
the Mortgage Bankers Association. This allowance will be reviewed on a quarterly
basis and adjusted when necessary based on the Company's collection experience.
NOTE 2 - RELATED PARTY TRANSACTIONS
During part of the quarter ended December 31, 2003, the Company subleased office
space from B & G Acceptance Corp., a company controlled by a beneficial owner of
the Company. The Company paid $2,200 a month for the office space and $3,800 a
month for office expenses. The Company moved its offices to a new location on
November 1, 2003. The new lease is with an unrelated party.
On July 17, 2002, Boca First Capital, LLLP, a Florida limited liability limited
partnership acquired control of Capitol Communities Corporation. The Company
entered into a Business Loan Agreement with Boca First Capital LLLP dated April
26, 2002 to borrow up to the sum of $3,000,000 from Boca First Capital LLLP. On
September 27, 2002, the line of credit was increased from $3,000,000 to
$4,000,000.
As of December 31, 2003, the Company has drawn $1,245,000.00 on the
$4,000,000.00 credit line from Boca First Capital LLLP evidenced a promissory
note secured by substantially all of the assets of the Operating Subsidiary. The
collateral securing the note includes a mortgage on the remaining 734 acres of
the Maumelle Property, 1,000 shares of common stock of the Operating Subsidiary
owned by the Company, representing one hundred percent of the issued and
outstanding shares and a note receivable payable on January 10, 2006 with a face
value of $1,000,000.00, respectively, with an annual rate of interest of 5.75%.
The Boca First Capitol LLLP Line of Credit matures on November 1, 2004, and has
an initial interest rate of ten percent (10%) per annum and will, on a quarterly
basis, adjust to a rate which is equal to the greater of ten percent per annum
or one percent (1%) above the prime rate in effect on that date.
Commencing in September, 2002, the Company entered into an informal agreement
with a related party for consulting services. The monthly fee is $2,500.
The Company had an employment agreement with its former President; however,
compensation under the agreement was reduced to zero as of September 27, 2002.
The employment agreement was effectively canceled upon the resignation of the
President in January, 2004. The Company is not a party to any other employment
agreements.
F-6
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 2 - RELATED PARTY TRANSACTIONS (CONTINUED)
In conjunction with moving its offices in the current quarter, the Company
purchased $25,000 of used office furniture and equipment from B & G Acceptance
Corp., a company controlled by a beneficial owner of the Company.
During the quarter ended December 31, 2003, the Company paid approximately
$60,000 in gross mortgage broker fees to beneficial owners of the Company. A
portion of the gross fees were distributed by the beneficial owners to other
mortgage brokers and consultants and to other vendors for costs.
NOTE 3 - CAPITAL TRANSACTIONS
On November 5, 2003, the Company issued 1,000,000 shares of restricted common
stock to Noble Financial International Inc., in consideration of consulting
services to be performed over a six-month period. The stock provides
registration rights to Noble if and when the Company registers additional
securities with the Securities and Exchange Commission.
During the first quarter, the Company's management discovered and corrected an
error in the number of outstanding common and treasury stock. The net effect of
the error correction was zero. All corrections are shown in the Consolidated
Statement of Changes in Stockholder's Equity.
NOTE 4 - NON-QUALIFIED EMPLOYEE STOCK OPTION PLAN
The Company has a Stock Option Plan under which directors, officers, key
consultants and other persons employed by the Company may be granted options to
purchase shares of the Company's authorized but unissued or reacquired common
stock. The maximum number of shares available for issuance under the Plan is
3,000,000 shares. As of December 31, 2003 the maximum number of shares available
for future grants under the Plan is 300,000 shares. Under the plan the option
exercise price shall not be less than the Fair Market Value of the stock.
Options currently expire no later than 10 years from the grant date. Proceeds
received by the Company from exercises of stock options are credited to common
stock and additional paid-in capital. Additional information with respect to the
Plan's stock option activity is as follows:
Number of Options Weighted Average
Exercise Price
Outstanding at September 30, 2003 0 0
Granted 25,000 0.075
Exercised 0 0
Cancelled 0 0
Outstanding at December 31, 2003 25,000 0.075
NOTE 5 - COMMITMENTS AND CONTINGENCIES
In November, 2003, the Company executed a 31 month lease for its office facility
in Boca Raton, Florida. Rent expense is approximately $4,000 per month,
including CAM.
Effective October 1, 2003, the Company entered in a financial advisory services
agreement with Noble International Investments, Inc. for a term of six months.
Fees under the agreement total $60,000 in cash and 1,000,000 shares of
restricted common stock.
NOTE 6 - LEGAL PROCEEDINGS
The Company is not involved in any other litigation, other than those actions
arising from the normal course of business which management does not believe
will have a material effect on the Company's operations.
F-7
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 7 - SUBSEQUENT EVENTS
Subsequent to the Company's quarter ended December 31, 2003, the Company,
through its wholly-owned subsidiary, Interfund Mortgage Corp., made secured
short-term loans of approximately $1,500,000. Through its wholly-owned
subsidiary, Capitol Development, Inc., the Company purchased land for
approximately $250,000.
At a Board of Director's meeting on January 14, 2004, Michael G. Todd resigned
as President and Chief Executive Officer of the Company. Mr. Todd will continue
as a Director of the Company and Chairman of the Board.
On January 14, 2004, Raymond Baptista resigned as Director of the Company. The
Board accepted the resignation of Mr. Baptista as a Director and of Mr. Todd as
President and Chief Executive Officer.
Also on January 14, 2004, the Board took the following actions:
o Appointed Ashley Bloom to the position of Acting President and Chief
Executive Officer. In addition, the Board appointed Mr. Bloom as a
Director of the Company to fill the seat vacated by Mr. Baptista.
o Approved the termination of services of public accounting firm Baum &
Company, P.A. in order to engage a larger public accounting firm with
more resources. This change was disclosed in the 8-K filed with the SEC
on January 22, 2004.
o Approved the appointment of Berkovits, Lago & Company, LLP as its
auditor, effective on January 19, 2004.
o Ratified a verbal agreement between Transcapital Bank and Interfund
Mortgage Corporation to enter into a $3,000,000 line of credit. The
Board authorized management to negotiate and finalize the terms of the
credit line, the proceeds of which will be used for lending activities.
o Authorized the issuance of 227,273 shares of restricted common stock to
Co-Star Realty, Inc., in consideration of consulting services performed
on behalf of the Company.
o Authorized management, in its own discretion, to make purchases of real
property for the Company's own portfolio up to the amount of $500,000
without Board approval.
On January 26, 2004, the Company issued 15,000 shares of stock to employees
which had been granted in December 2003 under its option program. On the grant
date the stock's market value was $0.075 and compensation expense totaling
$1,875 was recognized in December which included 10,000 options for an
independent director.
The Company's note receivable in the amount of $1,000,000 due from West Maumelle
LP was in default as to payment of interest effective January 16, 2004. Pursuant
to the terms and conditions of the agreement, the Company has increased the
note's interest rate from 5.75% to 6.25%.
F-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
In addition to historical information, this Report contains forward-looking
statements. Such forward-looking statements are generally accompanied by words
such as "intends," "projects," "strategies," "believes," "anticipates," "plans,"
and similar terms that convey the uncertainty of future events or outcomes. The
forward-looking statements contained herein are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to those discussed in ITEM 2 of this
Report, the section entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof and are in all cases subject to the Company's ability to cure its
current liquidity problems. There is no assurance that the Company will be able
to generate sufficient revenues from its current business activities to meet
day-to-day operation liabilities or to pursue the business objectives discussed
herein.
The forward-looking statements contained in this Report also may be impacted by
future economic conditions. Any adverse effect on general economic conditions
and consumer confidence may adversely affect the business of the Company.
Capitol First Corporation undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the Securities and
Exchange Commission, including without limitation those identified in the "Risk
Factors" section of the Company's Registration Statement filed with the
Securities and Exchange Commission (the "SEC") in September 1996 on Form 10-SB.
The following discussion should be read in conjunction with the unaudited
financial statements appearing in Item 1, of this Part 1 ("the Financial
Statements"), and the information provided in this Item 2, of this Report.
Financial Condition
As noted below and elsewhere in this Report, the Company is in the process of
diversifying its portfolio in order to generate revenues. Even though the
Company has enough borrowed money to meet its day-to-day operations, such
revenues are necessary to cure its current illiquidity position. During the
first quarter of the fiscal year ending September 30, 2004, the Company
diversified into real estate development in Florida and North Carolina and
financial lending for its own portfolio. The Company also continues to sell
property from its inventory of 734 acres of real property located in Maumelle,
Arkansas (the "Maumelle Property") that it deems not appropriate for
development. There can be no assurance, however, that the Company will be able
to liquidate its Maumelle Property at a fair market price or at all, or acquire
projects and finance loans that generate revenues, or that the Company will be
able to generate sufficient revenues from these business activities to meet
day-to-day operational liabilities or to pursue the business objectives
discussed herein.
Change in Financial Condition Since the End of Last Fiscal Year
At December 31, 2003, the Company had total assets of $10,109,522, an increase
of $630,485 or 6.6% from the September 30, 2003 total of $9,479,037. The
increase in total assets resulted from commencement of operations in the
Company's mortgage and development subsidiaries. The Company had cash of
$1,301,978 at December 31, 2003 compared to $2,661,998 at September 30, 2003.
The decrease was due to utilization of cash in mortgage lending and development
activities.
Total liabilities of the Company at December 31, 2003 were $8,183,442 an
increase of $1,056,471 from the September 30, 2003 total of $7,126,671. The
increase in total liabilities resulted primarily from commencement of operations
in the Company's mortgage and development subsidiaries for which operations the
Company borrowed approximately $1,000,000 of funds from banks and participants.
Accounts payable and accrued expenses increased by $92,435 due to increased
operating expenses incurred to support expanded operations.
Shareholders' Equity decreased to $1,926,080 at December 31, 2003, compared to
$2,352,366 at September 30, 2003, a decrease of $426,286. The decrease in equity
resulted primarily from the quarter's loss of $452,080 and payment of preferred
3
dividends of $54,306, offset by recording $80,000 of common stock issued as
payment for financial advisory services.
Change in Financial Condition - Comparing December 31, 2003 to December 31, 2002
- --------------------------------------------------------------------------------
At December 31, 2003, the Company had total assets of $10,109,522, an increase
of $3,207,796 or 46.5% from the December 31, 2002 total of $6,901,726. The
increase in total assets resulted from commencement of operations in the
Company's mortgage and development subsidiaries, an increase in real estate
holdings due to the reacquisition of 251 acres of real property located in
Maumelle, Arkansas and an increase in cash due to proceeds from the sale of
secured debt securities as of September 30, 2003, offset by a decrease in
investment in TradeArk Properties, LLC ("TradeArk"), due to its dissolution
during the fiscal year ended September 30, 2003. The Company's cash increased to
$1,301,978 at December 31, 2003 compared to $5,925 at December 31, 2002 due to
proceeds from the sale of secured debt securities, net of cash used for mortgage
lending, development and operating activities during the first quarter.
Total liabilities of the Company at December 31, 2003 were $8,183,522, an
increase of $4,443,436 from the December 31, 2002 total of $3,740,086. The
increase resulted primarily from the issuance of secured debt securities in the
amount of $3,000,000, an increase of approximately $1,000,000 in borrowings from
banks and participants related to commencement of lending activities and a note
payable of $580,000 related to the dissolution of TradeArk offset by a decrease
in accounts payable.
Total stockholders' equity of the Company at December 31, 2003 was $1,926,080, a
decrease of $1,235,560 from the December 31, 2002 total of $3,161,640. The
decrease resulted primarily from the net losses experienced between the balance
sheet dates and payment of preferred dividends, net of increases in capital
stock accounts for the issuance of preferred and common stock.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 2003 TO THE THREE MONTHS ENDED
DECEMBER 31, 2002.
Revenues increased to $42,292 for the three months ended December 31, 2003,
compared to $32,610 for the three months ended December 31, 2002. The increase
was due to commencement of the company's financial lending and real estate
development programs for which interest income and management fee income was
earned. This increase was offset by a decrease in interest income from notes
receivable due to a reduction in both the outstanding principal amount and a
three-fourth point decrease in the interest rate charged to the borrower.
Cost of revenues increased to $10,414 for the three months ended December 31,
2003, compared to $0 for the three months ended December 31, 2002. The increase
was due to commencement of the company's financial lending and real estate
development programs for which interest expense directly related to interest
income from loans was recorded for funds borrowed from banks and participants.
General and administrative expenses increased to $297,561 for the three months
ended December 31, 2003 from $79,686 for the three months ended December 31,
2002, an increase of $217,875. The bulk of the increase, $145,000, or 67%, was
due to placement agent and financial advisory fees paid to Noble in connection
with the issuance of $3,000,000 secured promissory notes. In addition, other
consulting fees increased to $25,000 for the three months ended December 31,
2003 from $21,500 for the three months ended December 31, 2002. Legal fees and
audit fees increased to $44,964 for the three months ended December 31, 2003
from $13,331 for the three months ended December 31, 2002. The increase was due
to additional legal fees related to the issuance of promissory notes and the
formation of new operating subsidiaries. Operating expenses-related parties
decreased to $13,500 for the three months ended December 31, 2003 from $22,602
for the three months ended December 31, 2002 due primarily to cessation of rent
paid to a related party as of November 2003.
The operating loss recorded for unconsolidated subsidiaries accounted for under
the Equity method totaled a loss of $0 for the three months ended December 31,
2003 compared to a loss $75,000 for the three months ended December 31, 2002.
Interest income earned on cash balances increased to $5,658 for the three months
ended December 31, 2003 from $579 for the three month period ended December 31,
2002. The increase was due to an increase in average cash balances following the
issuance of $3 million promissory notes in late September, 2003.
Interest expense increased to $167,055 for the three months ended December 31,
2003 from $70,053 for the three months ended December 31, 2002. The increase of
$97,002, or 138%, was due to adjustments in the quarter ended December 31, 2002
which decreased interest expense on the New Era note and approximately $59,000
of interest expense in the quarter ended December 31, 2003 for the newly issued
$3 million secured promissory notes.
During the first quarter of 2004, an adjustment of $25,000 was made to correct
an error in the carrying value and related overstatement of extraordinary gain
recorded in the fourth quarter and fiscal year ended September 30, 2003, with
respect to unsecured promissory notes. No settlements of these notes were
negotiated during the first quarter of 2004. In the quarter ended December 31,
2002, the Company negotiated settlement agreements with unsecured promissory
note holders to exchange $446,330 in debt and accrued interest of $135,902 for
$167,115 in cash and notes and 216,858 shares of Series A Preferred Stock. The
Company recognized an extraordinary gain from the retirement of debt at a
discount of $205,127 during the quarter ended December 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents amounted to $1,301,978 as of December 31,
2003, as compared with $5,925 at December 31, 2002.
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INDEBTEDNESS AND OTHER LIQUIDITY REQUIREMENTS. The principal amount of the
Company's total debt at December 31, 2003, included, without limitation, the
following:
As of December 31, 2003 and the date of this Report, the Company had
$214,278 in non-recourse promissory notes ("Non-Secured Notes") that had matured
and were due and owing. The Company has been trying to settle these Non-Secured
Notes, but either were not able to contact the note holder or the note holder
was non-responsive. During the quarter ended December 31, 2003, the Company did
not negotiate any settlement agreements. The Non-Secured short-term debt was
financed by private sources, and generally bear interest at a rate ranging from
10.9% to 14% per annum.
The Company has drawn $1,245,000 on its $4,000,000 note from Boca First Capitol
LLLP, (Boca Note") as of December 31, 2003. The Boca Note is evidenced by a
promissory note secured by substantially all of the assets of the Operating
Subsidiary and the Mortgage Subsidiary and the assets of any of the Company's
wholly-owned subsidiaries, now owned or to be acquired. The collateral securing
the Boca Note includes a second priority mortgage on approximately 736 acres of
the Maumelle Property, 1,000 shares of common stock of the Operating Subsidiary
owned by the Company, representing one hundred percent of the issued and
outstanding shares and one note receivable payable on January 10, 2006, with a
face value of $1,000,000.00 and an annual rate of interest of 5.75% and a
collateralized interest in the lending subsidiary's loan portfolio. The Boca
Note matures on November 1, 2004, and has an initial interest rate of ten
percent (10%) per annum which, on a quarterly basis, adjust to a rate which is
equal to the greater of ten percent per annum or one percent (1%) above the
prime rate, as published in The Wall Street Journal, in effect on that date.
The Company assumed approximately $3,500,000 in a loan from New Era Life
Insurance Inc. ("New Era Loan"), when it reacquired 251 acres of real property
in Maumelle, Arkansas for its membership interest in TradeArk Properties. Two
parcels of the real property were sold in the fiscal year ended September 30,
2003, and approximately $1,800,000 was paid on the loan. The loan is secured by
Tract D and carries an interest rate of 13% per annum and matures on March 12,
2004. Payments of interest only are due quarterly. As of December 31, 2003 and
the date of this Report, the loan had a balance of $1,665,857.
In the preceding fiscal year ending September 30, 2003, the Company
borrowed $3,000,000 evidenced by secured promissory notes from individual
investors. The notes have a per annum interest rate of 8% and are payable
monthly, interest only, with the principal and interest due three years from
September 11, 2003. The Secured Notes are secured by a first priority mortgage
on approximately 250 acres of the Maumelle Property and a Collateral Pledge on
$2,100,000 of the cash proceeds and any substitute collateral thereafter.
During the quarter ended December 31, 2003, the Company sold $266,000 of
loan participation agreements to investors. The participation agreements bear
interest at rates of 12.0 to 12.5% and mature with the underlying commercial
loans, which currently are all one-year terms. The participation agreements are
secured by real property in proportion to the participant's pro-rata interest in
the loan.
CERTAIN RECENT EVENTS RELATING TO THE COMPANY'S INDEBTEDNESS AND
LIQUIDITY REQUIREMENTS
The Company's current illiquidity prevents it from meeting its
day-to-day operational liabilities, except with borrowed funds. Although
management anticipates that the sale of all or portions of the Maumelle
Property, its development projects and loan portfolio will generate progressive
revenues for the Company, there can be no assurance the Company will be able to
generate enough revenues to meet its financial obligations, much less profit
from such activities.
The Company does not foresee any significant elements of income or loss
that would arise outside of the ordinary course of business, except for the
losses that would likely arise if the Company (i) becomes unable to continue the
growth of its operations in financial lending (ii) experiences material
delinquent or defaulted loans in its portfolio (iii) becomes unable to commence
significant operations in real estate development or (iv) has to liquidate the
Maumelle Property for less than fair market value.
Even if the Company can overcome its present liquidity issues, there is
no assurance that the Company will be able to successfully develop real estate
projects or obtain revenue generating loans.
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PROSPECTIVE SOURCES OF LIQUIDITY. Current operating cash flows do not
service the Company's existing debt or the Company's day-to-day operations. The
Company has listed for sale with an unaffiliated real estate broker a
significant portion of the Maumelle Property. Any proceeds from the sale of
Maumelle land will be used to reduce current debt and provide working capital.
Management intends to keep the Maumelle property listed for sale throughout
fiscal year 2004.
The Company and its wholly-owned subsidiary, Interfund Mortgage Corp.,
("Mortgage Subsidiary") made secured short-term loans of approximately
$2,023,000 during the quarter ended December 31, 2003.
With respect to prospective long-term liquidity, the Company has
identified several real estate acquisition and financing opportunities as a part
of its strategic business plan that will allow it to generate cash flow from
real estate development, interest on its investments, financing arbitrage,
hypothecation arbitrage, development fees, and equity participations from joint
ventures. The Company has acquired and intends to continue to acquire and/or
develop real estate and loans for its own portfolio in fast growing markets such
as Florida and North Carolina.
The Company is currently in the process of raising additional funds
through a private placement offering, pursuant to Rule 506 of Regulation D, of
debt securities with a minimum offering of $1,000,000 and a maximum of
$8,000,000, from private investors to assist the Company in implementing its
business plans. There can be no assurance, however, that the Company will
successfully be able to raise all or some of the additional funds or if it does,
that its development and investment plans will generate revenues or net profits
to the Company.
The Company anticipates paying commissions to Noble International
Investments, Inc. ("Noble"), a registered broker/dealer firm, equal to two and
one quarter percent (2.25%) of the gross proceeds of the Offering or $180,000,
whichever is greater, and subject to raising at least $3,000,000 in the
Offering. In addition, Noble, or its designee, shall be provided with restricted
common stock of 2,500,000 shares of the Company upon the completion of the
offering. Management of the Company anticipates that it will raise at least a
portion of the Secured Promissory Note offering. No commissions will be paid on
portions raised by management.
SUBSEQUENT EVENTS
Since the end of the first quarter ended December 31, 2003, the Company, through
its Mortgage Subsidiary has subsequently made secured short-term loans of
approximately $1,500,000. Through its wholly-owned subsidiary, Capitol
Development, Inc., ("Development Subsidiary") the company purchased land for
approximately $250,000.
On January 14, 2004, at a meeting of the Board of Directors, Michael G. Todd
resigned as President and Chief Executive Officer of the Company. Mr. Todd will
continue as a Director of the Company and as Chairman of the Board of Directors.
On January 14, 2004, Raymond Baptista resigned as Director of the Company.
On January 14, 2004, the Board appointed Ashley Bloom to the position of Acting
President and Chief Executive Officer. In addition, the Board appointed Mr.
Bloom as a Director of the Company to fill the seat vacated by Mr. Baptista.
On January 14, 2004, the Board approved the termination of services of public
accounting firm Baum & Company, P.A. in order to engage a larger public
accounting firm with more resources.
On January 14, 2004, the Board approved the appointment of Berkovits, Lago &
Company, LLP as its auditor, effective on January 19, 2004.
During the second quarter, the Board:
o Approved the appointment of Monica Schreiber to the position of
Consulting Chief Financial Officer for a term of 90 days;
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o Ratified a verbal agreement between Transcapital Bank and Interfund
Mortgage Corp. to enter into a $3,000,000 line of credit. The Board
authorized management to negotiate and finalize the terms of the credit
line, the proceeds of which will be used for lending activities;
o Authorized the issuance of 227,273 shares of restricted common stock to
Co-Star Realty, Inc., in consideration of consulting services performed
on behalf of the Company;
o Authorized the issuance of 50,000 shares of restricted, voting common
stock to Donald LeGault, Director, as partial compensation for serving
on the Board. Mr. LeGault recused himself for the vote; and
o Authorized management, in its own discretion, to make purchases of real
property for the Company's own portfolio up to the amount of $500,000
without Board approval.
On January 23, 2004, the Company entered into a contract with a third party to
sell 38.65 acres of Maumelle, Arkansas property, known as Tract D at a price of
$3,400,000. The purchaser has 60 days to perform due diligence, with closing 15
days after the diligence period. Should the transaction close according to the
agreement, the proceeds will be used to pay down New Era and other debt.
On January 26, 2004, the Company issued 15,000 shares of stock to employees
which had been granted in December 2003 under its option program. On the grant
date the stock's market value was $0.075 and compensation expense totaling
$1,875 was recognized in December, which included 10,000 options for an
independent director.
The Company's wholly-owned subsidiary, Interfund Investment Fund I, LLC,
anticipates raising a minimum of $1,000,000 to a maximum of $8,000,000 of
secured debt securities to private investors in a private placement offering
pursuant to Rule 506 of Regulation D. The secured notes bear interest at a rate
of 8% per annum, with interest payable monthly commencing the month subsequent
to the closing date. Note holders may earn a success fee, subject to the terms
of the Note, of an additional 2% to 4% to be calculated after maturity and
payable three months after maturity. The entire principal and any accrued
interest is due and payable on March 31, 2007. The secured notes are secured by
all the assets of the Fund pursuant to a Security Agreement and Collateral
Agency Agreement. The Private Placement Memorandum of the Fund, the use and
compensation of the investment banking firm, including issuance of 2,500,000
million shares of common stock to the investment banking firm should they raise
a minimum of $3,000,000 in the Offering, was approved by the Board subsequent to
the end of the first quarter.
The Company's note receivable in the amount of $1,000,000 due from West Maumelle
LP was in default as to payment of interest effective January 16, 2004. Pursuant
to the terms and conditions of the agreement, the Company has increased the
note's interest rate from 5.75% to 6.25%.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the
participation of our management, including our Acting President/Chief Executive
Officer and Treasurer, of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report. Based
upon that evaluation, the President/Chief Executive Officer and Treasurer have
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this Quarterly Report in accumulating and
communicating to our management, including them, material information required
to be included in the reports we file or submit under the Securities Exchange
Act of 1934 as appropriate to allow timely decisions regarding required
disclosures.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Based on an evaluation, under the supervision and with the
participation of our management, including our Acting President/Chief Executive
Officer and Treasurer, there has been no change in our internal control over
financial reporting during our last fiscal quarter, identified in connection
with the evaluation, that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any other litigation, other than those actions
arising from the normal course of business, and for which Management does not
believe will have a material effect on the Company's operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company incorporates by reference the information regarding
defaults of certain debt obligations from Part I, ITEM 2 "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF PLAN OF OPERATION - Liquidity and Capital Resources,"
and PART II, ITEM 1, LEGAL PROCEEDINGS."
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
On October 13, 2003, at a Special Meeting of the Shareholders of the
Company, the majority of shareholders consisting of the controlling shareholder
of the Company, Boca First Capital LLLP ("Boca First"), voted to change the
Company's name from Capitol Communities Corporation to Capitol First
Corporation. Boca First beneficially owns 16,000,000 shares of the Company's
common stock, representing a 57.65% vote for the name change. There were no
votes cast against the motion to change the Company's name. No other matter was
considered at the Special Meeting nor were proxies solicited.
ITEM 5. OTHER INFORMATION
The Company incorporates by reference the information in Part I, ITEM
2, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION - Liquidity and
Capital Resources."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following Exhibits are filed as part of this Report.
Exhibit 11 Statement re: computation of per share earnings
Rule 13a-14(a)(15d-14(a) Certifications
Exhibit 31.1. Certification of Acting Chief Executive Officer and President
Exhibit 31.2. Certification of Treasurer
Section 1350 Certifications
Exhibit 32.1. Certification of Acting Chief Executive Officer and President
Exhibit 32.2 Certification of Treasurer
b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K with the Commission on October 29, 2003,
regarding the change in the name of the Company.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAPITOL FIRST CORPORATION
Date: February 13, 2004 By: /s/ Ashley B. Bloom
-------------------
Ashley B. Bloom
Acting Chief Executive Officer and
President
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